Tax Incentives

Introduction

Malta’s accession to the European Union in 2004, together with the number of tax incentives introduced, which are aimed at attracting foreign direct investment, have made it an ideal jurisdiction for tax planning and corporate structures.

One of its main incentives is the full imputation system under which dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profits out of which the dividends are paid. Shareholders are taxed on the gross dividend at the personal rates but are entitled to deduct the tax credit attaching to the dividend against their total income tax liability. Recipients of dividends may elect for a refund of the Malta tax paid by the company.

Malta does not impose any withholding taxes on dividend, interest and royalties and does not have any Transfer Pricing and CFC legislation.

Tax Refund System

The standard corporate tax rate in Malta is 35% of the chargeable income for the fiscal year. Upon a dividend distribution from the Maltese company, shareholders receiving such distributions become entitled to claim a refund of the Malta tax paid by the company on those profits out of which distributions are made. Tax refunds also apply where a company operates through an oversea branch in Malta.

The refunds currently available are:

6/7ths refund: This type of refund is generally due on those profits earned from trading activities. Taking into account such refund, the effective rate of tax works out at 5%.

5/7ths refunds: This type of refund is generally due in respect of income derived from passive interest and royalties and income from participating holdings which do not qualify for the participation exemption. The effect rate of tax works out at 10%.

2/3rds refund: Available in those instances where the company has claimed double taxation relief. The refund depends on the type of double taxation relief availed of and is limited to the tax paid in Malta.

100% refund: Applies when profits are derived from a participating holding which qualifies for the participation exemption.

Participation Exemption

Participation Holding

A participating holding exists where a company holds directly at least 10% of the equity shares of a company whose capital is wholly or partly divided into shares and where such holding confers at least 10% of any of following: (i) a right to votes; (ii) a right to profits available for distribution and (iii) a right to assets available for distribution on the winding up of the company. The taxation authorities in Malta may also establish that an equity holding exists even where there is no holding of shares but where it is proven that at least two of the condition rights exist. A participating holding also exists when the following criteria are met:

The investment in the non-resident company amounts to EUR 1,164,700 or more, subject to a time duration test of 183 days

The Maltese company has the option to acquire the remaining balance of the equity shares in the non-resident company

The Maltese company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in the non- company

The Maltese company is entitled to sit on the Board of the non-resident company

The holding of shares in the non-resident company is for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes

Participation Exemption

Profits derived from a participating holding or from gains realised on the disposal of such holding may, subject to certain conditions, be exempted from tax in Malta. The exemption is available where the non-resident company or similar entity (in which the Maltese company owns the holding) is resident or incorporated in the EU; or is subject to foreign tax of at least 15% or does not have more than 50% of its income derived from passive interest or royalties. Where none of the above 3 conditions are met, the exemption is subject to an alternative test where both of the following 2 conditions must be satisfied – (1) the holding is not a portfolio investment and (2) the non-resident company or entity or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

A Maltese company receiving gains or profits from a participating holding or its disposal has an option not to claim the participation exemption but may pay tax at 35% instead. In such case, the company’s shareholders may (following a distribution of profits derived from the holding) claim a 100% refund of the tax paid by the company. This option affords flexibility in planning holding structures.

Double Taxation Relief

Malta’s domestic tax provisions relieve both juridical double taxation, through the various forms of relief explained below, and also economic double taxation mainly by the application of the Full Imputation System.

Malta adopts a credit method of Double Taxation Relief in accordance with Article 23B of the OECD Model Tax Convention. In addition to Treaty Relief, which would be applicable if the foreign tax had been incurred in a jurisdiction with which Malta had concluded a Double Tax Treaty, Malta extends its relief provisions unilaterally through three other forms of credit.

Unilateral Relief

This form of relief is granted on foreign tax, which is of a similar character to Maltese income tax, incurred on income arising outside Malta to a person resident in Malta or to a company registered in Malta. In accordance with the Income Tax Act, a company resident in Malta (but not necessarily incorporated in Malta) falls within the definition of ‘a company registered in Malta’. This type of relief is applicable when Treaty relief and Commonwealth Relief are not available.

Flat Rate Foreign Tax Credit (FRFTC)

This form of relief is granted to companies registered in Malta in receipt of income which is allocated to the Foreign Income Account for Maltese Tax Accounting purposes. Income which is typically allocated to the Foreign Income Account would include income or gains from overseas investments, including royalties, interest, rents and dividends received from foreign investments. The FRFTC is a credit for a deemed foreign tax of 25% on the amount received by the company registered in Malta.

Commonwealth Relief

Although not commonly used, Maltese domestic legislation provides for relief in cases where a Maltese resident person pays or is liable to pay tax charged under a law of a Commonwealth country, excluding the United Kingdom or Malta.

Double Tax Treaties

Malta has entered into a considerable number of double-tax treaties. Generally speaking, the treaty benefits are available to all Maltese companies other than companies incorporated in terms of the Malta Financial Services Centre Act (offshore companies). All the treaties, other than the Swiss treaty, are based on the OECD Model Convention. Malta’s domestic legislation ensures that the Double Tax Treaties are supreme to such domestic legislation and avoid any issues of Treaty Override.

High Net Worth Individuals

Malta offers an interesting scheme for foreign individuals who relocate to Malta. The High Net Worth Individuals (HNWIs) Schemes have been launched in September 2011 offering interesting tax planning opportunities for foreigners who take up residence in Malta.

The Schemes replace a previous scheme called the Residents Scheme. Residents Scheme permit holders retained their existing rights but are required to satisfy certain additional conditions. The main characteristics of the HNWIs Schemes are similar to those prescribed under the old Residents Scheme – namely, the requirement to acquire or rent property in Malta and the entitlement to a special rate of tax on foreign income that is remitted to Malta. However, the HNWIs Scheme contains additional conditions.

Main features of the HNWIs Schemes

One HNWIs scheme is aimed at nationals of the EU, EEA and Switzerland whereas another scheme is aimed at HNWIs who are not nationals of the EU, EEA or Switzerland. Unlike other foreigners living in Malta, qualifying HNWIs are subject to Maltese tax at a reduced rate of 15% on foreign income (excluding capital gains) that is received in Malta.

Acquisition of property in Malta is a straightforward process and there are no capital or property taxes in Malta. A ‘stamp duty’ of 5% on the value of the property is due by the buyer at the time of purchase. No VAT is due on the acquisition of property. When foreigners sell their property (for instance in the course of exiting from the HNWIs or Residents Scheme), they are entitled to an exemption from capital gains tax in certain cases. No stamp duty or VAT is due on the letting of property. No stamp duty or VAT is due on the letting of property.

Global Residence Programme

The Global Residence Programme, as the new scheme is called, has come into force as from 1 July 2012. The flat tax rate of 15% on foreign sourced income received in Malta has been retained with the minimum tax liability being reduced from €25,000 plus €5,000 per dependent per annum to €15,000 per annum.

In order for the 15% rate to be applied the individual must not be a Maltese, EEA or Swiss national and must acquire or rent immovable property in Malta. The thresholds of the properties have also been reduced to €275,000, or €220,000 if the property is purchased in the south of Malta or on the sister island of Gozo. The rental thresholds have been reduced to €9,600 per annum, or €8,750 per annum if the property is rented out in the south of Malta or in Gozo. Individuals under this programme will be considered ordinarily resident but not domiciled in Malta for tax purposes, therefore any foreign sourced income which is not received in Malta is not taxable in Malta and foreign sourced capital gains are not taxed in Malta even if received in Malta.

The bond of €500,000 which was required for third country nationals has been removed.

Company Redomiciliation

The re-domiciliation of companies in Malta is regulated by the ‘Continuation of Companies Regulations 2002’ (Legal Notice 344 of 2002) which came into effect on the 26 November, 2002. In terms of the regulations, foreign companies formed and incorporated under the laws of an approved country other than Malta may be continued in Malta in terms of the Companies Act. Similarly, a company incorporated in Malta may be continued in a jurisdiction other than Malta as permitted by the laws of the other jurisdiction. The ‘Continuation of Companies Regulations 2002’ are indeed relevant to all types of companies including those companies carrying out certain licensed activities.

A body corporate formed and incorporated or registered under the Laws of an approved jurisdiction other than Malta may, provided that certain conditions are met, request the Registrar of Companies to be registered as being continued in Malta. This would allow the body corporate to continue its operations in Malta without having to wind up the Company in its jurisdiction. Redomiciliation is governed by Legal Notice 344 of 2002, Continuation of Companies Regulations, 2002.

The regulations are divided into two parts. Part 1 deals with the Continuation in Malta of a Foreign Company, while part 2 deals with the continuation outside Malta of companies incorporated in Malta.

A number of conditions need to be satisfied for a foreign Company to be able to continue its operations in Malta. The country of original registration must have the appropriate legislation in place allowing company’s domiciled within its territory to effectively re-domicile their activity to another country. The charter, statutes or memorandum and articles or any other instrument constituting or defining the Company must also authorize the Company to do so. A request to the Registrar to be considered for registration as continuing in Malta under the Act must be submitted together with supporting documentation.

Recent changes enacted to Malta Law also provide for ‘Step-up’ provisions which allows a Company being re-domiciled to Malta or a Company resulting following a merger which meets the EC Merger Directive, to claim a step up in the tax base costs of any assets held outside Malta. Effectively, this will enable the Company to revalue its overseas assets to fair market value at the time the re-domiciliation process is undertaken. The re-valued cost, which should be notified to the IRD, will constitute the new acquisition cost of the assets when calculating any subsequent gain. It is also worth noting that capital allowances available under the Income Tax Act will henceforth be calculated on the stepped-up value of the assets.